This month, the Caru Ventures blog is being issued under a new banner. As I mentioned at the start of the year, I am working with a number of partners on the development of a new type of venture capital fund. I’m delighted to be able to introduce to you this new organization, Northface Ventures. The project is still in the validation phase but is gaining significant support from potential partners both corporate and institutional. I hope to share more details over the coming months.

I’ve been considering for the last week a range of topics on which to share some thoughts following a welcome summer break. Indeed, I was looking to move away from the “big corporate” dynamics that have dominated most of these posts this year to date. However, yesterday’s news of Google’s agreed offer for Motorola blew all that out of the water. What a game changer, from way out of left field!In summary, what Google has acquired is:

The worlds eighth largest manufacturer of mobile handsets and tablets.

The worlds second largest TV Set Top Box manufacturer

As others have been quick to point out, the patent portfolio will give Google a useful armoury with which to defend the Android platform and the Open Handset Alliance (OHA) against patent infringement suits by Apple, Microsoft, Oracle and others. It is also the main reason why, in public at least, many of Google’s Android partners have welcomed the deal.

Acquisition of the handset division gives Google ownership of arguably one of the leading Android hardware design and manufacturing teams. Both Droid and Xoom have been well received by the market, and have been a major reason for the Motorola turnaround over the last twelve months. Limitations in distribution reach appear to be the main constraint on the success of those devices, something Google’s marketing and financial muscle could quickly help address.

The acquisition also gives Google another option for “fixing’ Google TV. The platform has been struggling to take off, in part because the Google TV experience has been less well received than hoped, in part because broadcasters have withheld rights to stream content through Google TV boxes. That Motorola may now switch focus to Google TV may not please Motorola’s biggest STB customer, Comcast, (and that is a big risk). Nor may it have content owners flocking to its door. However, again by bringing hardware and software design under one roof, it does provide an excellent in-house platform to get this product off the ground and to go on and build a truly convergent experience across core device types - TV’s, tablets, and mobiles.

I share one thing in common with Stephen Elop. We are both big believers in vertically controlled device ecosystems offering seamless experiences across multiple device types. As Elop said at the Open Mobile Summit in June, “Future competition will be between ecosystems, not between manufacturers of individual devices”.

The key question is whether those ecosystems can be created by independent manufacturers and software vendors working in concert or whether bringing software and hardware under one roof is essential for success.

In-house control of both hardware and software has certainly been a key element of Apple’s recent success, a strategy that has seen Apple double in value over the last two years while Google (and Microsoft) shares have tracked sideways within a defined range. Google’s recent introduction of anti-fragmentation clauses in its Android licences and its delay in releasing source code for Honeycomb both suggest that Google realizes the need to gain greater control over the user experience it offers across multiple devices.

If you share the “one-roof” view, then this transaction is a logical next step. It is worth noting that the financials and shape of the combined entity (Revenues of $41bn, margins of 25%, strong in-house hardware and software design teams) look very close to that of Apple at the end of 2009.

If instead you are a believer in open software platforms independent of hardware manufacturing, then you will expect to see Google sell off the manufacturing arms of Motorola while retaining the patent portfolio with which it can defend the Android community. Quite what value can be realized from a manufacturing design house without IP, is not clear to me.

In reality, the transaction is probably Google seeking to defend the Android ecosystem while hedging its bets on verticalisation. OEMs that use Android have few options over the next 12-24 months other than to continue product development around Android while they look to develop alternatives. Hence, the Open Handset Alliance community will probably remain intact for that period at least.

In the meantime, Motorola have that period of time to produce a set of devices across mobile, tablets and TVs that offer real competition to Apple. In the same window Google must also figure out if they can reach an accommodation with the major rights holders to allow their content onto Google TV. If Googorola succeeds in both of these areas, the combined entity is in play. If it fails, Google will sell the manufacturing units, and look to keep its OHA partners on board.

Author

Mike Grant has a long track record of successfully predicting major industry change. He identified the rise of the mobile as a personal entertainment device 5 years before the smartphone and 10 years before the iPhone, He anticipated the growth of Apple as a major power in mobile early in 1997, and the merger of Nokia and Microsoft two years in advance of the transaction. Follow Mike on Twitter @caruventures to receive this blog.